REPRINT  FROM  MOODY'S  MAGAZINE 


BANK  CLEAHINCIS  AND  SFXURITV  PRICES 

Bv  Fred  Tt.  Macahlay,  M.  A. 


I. 

WERE  I  asked  to  name  the  half- 
dozen  most  important  eco- 
nomic  I'actors  for  an  in- 
vestor or  speculator  in  American  se- 
curities to  carefully  watch,  I  should 
include  among  them  bank  clearings. 
Considering  that  both  the  speculator 
and  the  wise  investor  are  more  inter- 
ested in  the  future  than  the  present, 
such  advice  would  undoubtedly  be 
held  by  most  financial  writers  to  be 
slightly  unsound.  The  Commercial 
and  Financial  Chronicle  of  New  York, 
for  example,  has  remarked  a  number 
of  times  that,  though  clearings  are 
of  great  interest  as  showing,  better 
perhaps  than  any  other  single  class 
of  statistics,  the  pro^ent  condition  of 
business,  they  are  almost  valueless 
as  a  means  of  forecasting  the  future. 
A  Boston  market  letter  writer  who 
has  come  into  print  quite  often  re- 
cently and  who,  partly  because  he  is 
almost  entirely  eclectic,  well  repre- 
sents his  class,  thus  speaks  of  clear- 
ing statistics: — 

"Some  people  make  the  mistake  of 
assuming  that  by  studying  clearing 
house  statistics  one  can  easily  fore- 
cast  business  conditions.  A  study  of 
these  statistics  is  an  aid  in  forecast- 
ing business  conditions  and  therefore 
is  one  of  the  factors  used  in  making 
such  a  forecast,  but  taken  by  them- 
selves they  are  of  little  value,  as 
they  refer  only  to  present-day  condi- 
tions." ^ 

The  above  writer  never  discusses 
New  York  clearings  separately  (i.e., 
other  than  as  contained  in  the  totals 
for  the  United  States),  let  alone  ana- 


lyzing the  excess  of  New  York  over 
the  rest  of  the  country.  When  ana- 
lyzed as  practically  all  financial  writ- 
ers analyze  them,  clearings  are  al- 
most valueless  as  a  guide  to  the  fu- 
ture, but,  when  correctly  analyzed,  I 
believe  them  to  be  of  paramount  im- 
portance and  that  they  should  be 
watched  by  the  careful  speculator 
only  less  closely  than  such  factors  as 
the  condition  of  the  New  York  Asso- 
ciated Banks  and  the  reports  of  the 
Comptroller  of  the  Currency. 

In  this  article  I  shall  first  point  out 
the  methods  of  treatment  of  clearing 
house  statistics  at  present  used  by 
financial  writers,  and  then  place  be- 
fore the  reader  a  new"  method  of 
treatment  which  is,  at  least,  not  un- 
meaning and  impotent  in  the  face  of 
the  facts. 

In  examining  the  methods  oi'  treat- 
ment at  present  in  use,  let  us  con- 
sider : 

1.  What  figures  are  selected  for 
discussion. 

2.  With  what  are  such  figures 
compared  ? 

What  Fig-ures  Are  Selected  for  Discussion  ? 
The  Commercial  a  n  d  Financial 
Chronicle,  which  makes  quite  a  spe- 
cialty of  clearing  statistics,  makes 
weekly  reports  of  the  week's  clear- 
ings for  the  whole  of  the  United 
States,  for  the  country  outside  of 
New  York,  for  New  York,  and  for 
each  other  important  city  in  the 
United  States  individually.  Once  a 
year  this  magazine  publishes  an  edi- 
torial entitled  "Clearings  and  Specu- 
lation in  the  Preceding  Year."  Here 
we  find  quotations  as  follows: — 


*  R.   W.   Babson — "Business   Barometers   for   Forecasting  Conditjions" — page   210. 


346067 


V' 


A- 


2    /A .*  :-•*: ;.'.• '..'.  '-. :,,'  :\  -MOODY'S    MAGAZINE 


Yearly — New  York;  outside  New 
York ;  total  United  States ;  a  number 
of  leading  cities. 

Quarterly — New  York ;  total 
"Other  Middle";  total  New  England; 
total  Middle  Western;  total  Pacific; 
total  "Other  Western";  total  South- 
ern ;  total  all ;  outside  New  York. 

Monthly— Total  United  States; 
outside  New  York. 

The  first  point  I  wish  to  draw  at- 
tention to  is  that,  in  discussing  such 
a  rapidly  fluctuating  factor  as  bank 
clearings,  statements  of  yearly  totals 
are  valueless  and  statements  of  quar- 
terly totals  of  but  little  significance; 
we  must  get  down  to  the  month  or 
week  to  attain  anything  like  an  ideal 
unit.-  This  is  not  done  in  this  analy- 
tical article,  and  any  references,  in 
the  week  to  week  notices,  are  hardly 
ever  more  than  a  mere  verbal  resume 
of  the  figures  themselves. 

Secondly,  quotations  are  not  given 
for  New  York  minus  the  rest  of  the 
country  in  this  or  any  other  financial 
paper  that  I  have  ever  seen.  As  I 
shall  attempt  to  show  later,  the  quo- 
tation for  "New  York  minu>i  tJie  rest 
of  the  count)]],'"  though  it  be  but  a 
mathematical  abstraction,  is  the  one 
important  feature  to  notice.  Without 
it,  the  whole  subject  is  but  an  inex- 
plicable hodge-podge  of  figures.  A 
glance  at  the  chart  annexed  to  this 
article  will  show  the  regularity  with 
which  the  clearings  for  the  country 
outside  of  New  York  (E)  increase'- 
from  year  to  year,  and  the  wild  ec- 
centricity of  New  York's  clearings 
(D).  This  eccentricity  is  apparent 
to  the  most  casual  observer,  and  calls 
for  some  explanation.     In  a  correct 


explanation  lies  the  solution  of  the 
whole  problem.  The  Commercial  ayid 
Financial  Chronicle  (and  I  refer  to  it 
as  an  example  of  the  best  financial 
journalism  of  the  country)  has  all 
along  assumed  that  the  eccentricities 
of  New  Yoi'k's  clearings  were  caused 
by  some  uoti -significant  factor  which 
should  be  carefully  eliminated  if  the 
figures  were  to  mean  anything.  Some 
years  ago  it  formulated  the  theory 
that  these  vagaries  of  New  York's 
clearings  were  caused  by  stock  ex- 
change transactions  and  that  if  we 
were  to  subtract  tivice  the  "actual" 
value  of  the  shares  traded  in  on  the 
New  York  Stock  Exchange  (B)  from 
the  New  York  clearings  total  (D), 
we  would  get  the  "normal  business" 
clearings  for  New  York  and  a  result 
worth  while  examining.  This  factor 
of  2  was  used  in  1885^,  1886"',  and 
1887'=;  in  1888"  the  factor  was 
changed  to  21/2  and  remained  so  until 
1892  (inception  of  the  New  York 
Stock  Exchange  Clearing  House) 
when  the  whole  system  was  aban- 
doned.^ 

During  all  this  period  the  out- 
spoken attitude  of  the  Chronicle  was 
that  the  fluctuating  factor  equalled 
twice  (later  2Y>  times)''  the  actual 
value  of  the  shares  traded  in  on  the 
New  York  Stock  Exchange  and  was 
of  almost  no  significance,  merely  fog- 
ging the  result'" — that  the  non-fluc- 
tuating factor  which  remained  after 
the  fluctuating  one  had  been  sub- 
tracted from  the  New  York  total, 
though  of  no  particular  significance, 
was  rather  interesting  as  showing 
New  York's  "normal  business"  clear- 
ings. 


^  Could  Moody's  MAfiAziNK  imlilish 
3  C.  &  F.  Chron.  \'ol.  XC.  p.  so. 
*  C.  &  F.  Chron.  \'.>1.  XT..  ,,.  7(i. 
■'■  C.  &  F.  Chron.  \ol.  Xl.ll.  ]..  .T 
«  C.  &  F.  Chron.  \ol.  WA\\  p.  : 
■  r.  &  F.  Chron.  \'<<\.  XI,\I.  p.  ; 
"  C.  \-  F.  Chron.  \  nl.  I.\|,  p.  (;. 
^  "   Why   this   cliansjr    1    .In   ih,i    kimw 

tiuns   ruling   prinr  tn    I  sn:.'    Iriicls  nir   l 
■"  C.   &   F.   Chron.    \ul.    I.X.    p.    (in 

3  908.) 


Hich    a    larg   chart. 

(.Ian.    S.    191(1.) 

I  Jan.    17,    ISS.').) 

■  >.        (.Ian.     9,     1SS().  ) 

i4.       (.Ian.    s.     ISST.) 

1.       (.Ian.    7.     isss.) 

(.Ian.     7.     1n9:;.) 

.\    i-arrful    r^tiniat 
"   I'laiT    1    (;.')-!  (10    as 
(Jan.     12,    189.-).) 


■)nlrl    preft-r    to    usi.-    thi 


lok   as    a   unit. 


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BANK    CLEARINGS    AND    SECURITY    PRICES 


Having  to  relinquish  (after  the  be- 
ginning of  the  New  York  Stock  Ex- 
change Clearing  House)  the  "2V-> 
method,"  the  Cltroiiicle  still  clung  to 
the  "stock  sales'  theory,  though  real- 
izing that  its  practical  application 
was  gone".  An  examination  of  the 
two  curves  (stock  sales — B — and 
New  York's  Clearings — D — )  soon 
reveals  the  fact  that,  though  there 
are  many  surface  similarities,  the 
contours  are  essentially  different. '- 
This  is  entirely  aside  from  a  consid- 
eration of  the  true  significance  of  the 
peculiar  irregularities  of  New  York's 
curve. 

We  thus  see  that  the  figures  studied 
are  Total  United  Statei^  (which  is  an 
hermaphroditic  sort  of  a  combination 
of  New  York  and  the  rest  of  the 
country),  The  Rest  (which  is  of  an 
extremely  steady  and  unfluctuating 
character  and  moves,  when  it  does 
move,  after  nearly  all  other  factors), 
and  Neic  Yoik — when  they  can  elim- 
inate the  fluctuating  factor !  As  my 
object  in  writing  this  article  is  to  at- 
tempt to  show  that  in  this  fluctuat- 
ing factor  we  find  the  solution  of  the 
whole  problem,  the  above  methods  of 
treatment  naturally  do  not  greatly 
appeal  to  me.  Let  us  now  examine : 
"With  What  Are  Such  Figures  Compared? 

There  are  four  comparisons  that 
have  been  used  by  diff'erent  writers. 
They  are : — 

1.  With  the  immediately  preceding- 
month. 

A  mere  glance  at  the  chart  shows 
this  comparison  to  be  almost  mean- 
ingless. It  takes  no  account  of  nor- 
mal growth  or  of  the  great  "waves" 
on  w^hich  the  monthly  variations  are 
often  but  as  ripples  and  foam. 
Through  the  influences  of  seasonal  or 

"  In  AiJiil.  IIMII,  fur  L-xaniplc.  2  >j  linus  tin-  acUial  v; 
total  of  Ntw  York's  clearings.  This  woiilil  give  New  \ 
The   stock  clearing   house   iloes   not   now    ])ul)lish    statistics. 

'-  In  only  !)  months  (Sept.,  1903,  to  June,  1004)  the  ratio  of  the  ".Vetual  \alue"  to  tile  .\e\v  York 
clearings  dropiK-d  from  about  10  per  cent  to  about  «  per  cent:  the  ratio  of  the  actual  to  the  Xcw  York 
excess  dropped  from  about  7T  per  cent  to  about  -.^3  per  cent.  While  the  one  was  increasing  tlie  other 
was  decreasing.      (.See  chart.) 


other  temporary  factors,  the  monthly 
variation  may  run  absolutely  counter 
to  the  great  movement  in  progress. 
None  but  the  most  ignorant  journal- 
ists now  rely  upon  such  a  method. 

2.  With  the  same  calendar  month 
in  the  preceding  year. 

This  is  the  common  comparison  in 
use  by  nearly  all  financial  writel's.  It 
is  better  than  number  one,  but  is 
open  to  many  objections.  It  does  not 
show  at  what  stage  in  a  movement 
we  pre,  because  there  is  no  possible 
comparison  with  what  would  be  nor- 
mal figures  but  only  with  last  year's 
figures,  which  are  probably  normal 
neither  for  last  year  nor  this  year. 
The  method  is  an  incomplete  attempt 
to  eliminate  seasonal  variations  in 
the  use  of  number  one,  and  this 
brings  us  to 

3.  With  a  ten  or  twenty  year  aver- 
age for  the  same  calendar  month. 

This  is  an  atternpt  to  eliminate 
seasonal  variations  and  in  so  far  it  is 
rather  good.  However,  a  mere  glance 
at  the  chart  and  at  the  Te7i  Year  Au- 
erages  will  convince  anyone  that  sea- 
sonal variations  in  clearings,  though 
facts,  are  negligible  when  compared 
with  the  variations  which  occur  in 
great  waves  covering  from  two  to 
five  or  six  years.  Moreover,  the 
growth  element  is,  in  this  method, 
again  entirely  unconsidered.  In  TJie 
Rest  this  growth  element  is  the  great 
and  ever  persistent  factor,  to  neglect 
which,  is  to  be  absolutely  at  sea  in  an 
attempt  to  interpret  results. 

4.  With  the  immediately  preceding 
month,  attempting  to  eliminate  sea- 
sonal variations  by  quoting  both 
months  in  percentages  of  a  ten-year 
average  for  corresponding  months. 

This  method  has  all  the  merits  of, 


ue    of    the    stock    sail 
rk    a    "'normal    busine 


iiuallrd    more    than    the 
of    less    than    nothingl 


MOODY'S    MAGAZINE 


and  but  few  defects  not  inherent  in, 
either  "two"  or  "three."  However,  it 
absolutely  neglects  the  element  of 
growth,  and,  like  the  other  methods, 
often  fails  to  watch  the  great  two  and 
three-year  movements.  I  consider 
these  movements  so  overwhelmingly 
important  that  all  the  consideration 
I  give  seasonal  variations  is  to  keep 
a  ten-year  average  chart  at  hand  by 
which  to  roughly  check  up  whether 
the  year's  clearings  are  running  in  a 
normal  or  an  abnormal  fashion  from 
the  standpoint  of  seasonal  vari  .tions. 
Moreover,  when  we  remember  that 
both  the  supply  of,  and  the  rates  on, 
money,  also  run  through  a  seasonal 
variation,  we  begin  to  see  why  it  is 
perhaps  even  better  to  have  the  clear- 
ings figure  in  their  bare  and  un- 
doctored  shape  than  in  percentages 
of  a  ten-year  average.  The  ten-year 
average  is  a  good  servant  but  a  bad 
master. 

II. 
Without  further  discussion  of  the 
methods  of  treatment  of  others,  I 
shall  now  attempt  to  explain  and 
demonstrate  a  new  theory  of  my  own. 
First  of  all,  a  few  words  as  to  the 
chart  accompanying  this  article.  All 
quotations  are  monthly,  the  vertical 
black  lines  representing  January. 
The  Ten-Year  Averages  for  New 
York  and  The  Rest  are  charted  from 
the  lower  base.  The  Teii-Yeai-  Aver- 
uijei^  for  New  York  minus  The  Rest 
are  charted  from  the  upper  base. 
The  Ihie^^  x,  2.r,  3.ra,  ?>xh,  and  6.r  are 
such  that  their  ordinates  are  in  the 
ratio  of  their  numerical  coefficients. 
The  line  3xb  is,  as  can  be  plainly 
seen,  an  excellent  "fit" — the  actual 
curve  as  checked  up  by  least  squares 
and  areas  is  so  close  to  this  straight 
line  that  I  considered  it  better  to  keep 
to  the  straight  line  than  make  the 
chart  too  difficult  for  readers  to  con- 
tinue— the  curve  E  crosses  this 
straight  line  58  times,  there  are  90 


points  above  and  117  points  below — 
the  true  curve  runs  a  very  little 
;  bove  at  each  end  and  below  in  the 
middle  of  the  straight  line.  The  dot 
inside  a  circle  placed  on  the  line  2x  in 
1896  represents  a  point  such  that 
from  that  point  to  the  present  month 
the  areas  of  the  curve  A  above  the 
line  2x  exactly  equal  the  areas  below. 
Asterisks  above  the  curve  A  corre- 
spond to  asterisks  on  the  curve  C. 
All  points  on  the  Twenty  Rail  curve 
C  are  true  maxima  and  minima — that 
is,  between  any  two  consecutive 
points  no  quotation  higher  than  the 
one  or  lower  than  the  other  occurs. 
I  begin  the  chart  with  1894  to  be  be- 
yond both  1892,  when  stock  clearing 
began  and  189.3,  the  year  of  the  panic. 
My  method  is  to  study:  (a)  the  fig- 
ures in  their  relation  to  "growth 
9xes"' — (the  strright  lines),  (b)  The 
figures  in  their  relation  to  each  other 
—  (New  York  to  The  Rest) .  (c)  The 
artificial  figures  for  "New  York 
minus  The  Rest"  in  their  relation  to 
a  range  between  zero  (the  upper 
base)  and  the  growth  axis  for  The 
Rest.     (3xa.) 

In  the  first  place  I  base  all  growth 
axes  on  the  line  3xb.  I  have  already 
remarked  on  the  peculiar  manner  in 
which  the  clearings  outside  New 
York  increase  steadily  from  year  to 
year  with  comparatively  slight  fluc- 
tuations and  these  generally  of  a 
clearly  seasonal  nature.  When,  there- 
fore. New  York  (D)  passes  the  line 
6x  or  the  Excess  (A)  passes  the  line 
3xa,  New  York  is  clearing  roughly 
more  than  twice  what  the-rest  of  the 
country  is  clearing.  I  have  already 
pointed  out  that  the  line  2x  is  about 
the  normal  for  the  Excess  of  New 
York  over  The  Rest,  or  in  other 
words.  New  York  normally  clears 
nearly  one  and  two-thirds  times  as 
much  as  The  Rest.  One  great  advan- 
tage of  thus  studying  New  York  mi- 
nus The  Rest  (A)   is  that  we  have  a 


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BANK    CLEARINGS    AND    SECURITY    PRICES 


base  below  which  tlie  figures  tlo  not 
go,  hill  irliicli  tlii'ii  sometimes  ap- 
proach, whereas  in  studying  New 
York,  without  The  Rest  as  such  a 
base  we  cannot  judge  of  the  depth  of 
a  decline  with  any  degree  of  ac- 
curacy. 

New  York's  clearings  may  be  ex- 
haustively divided  into  three  parts : 

1.  Clearings  originating  in  trans- 
actions outside  New  York. 

2.  Clearings  originating  in  com- 
mercial transactions  within  New- 
York. 

3.  Clearings  originating  in  non- 
commercial (or  "financial")  transac- 
tions within  New  York. 

The  fact  that,  in  periods  when  New 
York's  financial  or  non-commercial 
transactions  are  know^n  to  be  almost 
at  a  standstill,  the  city  clears,  a  little 
more  than  the  whole  of  the  rest  of 
the  country,  gives  a  valuable  hint  as 
to  the  average  sum  total  of  the  clear- 
ings originating  in  transactions  out- 
side New  York  plus  the  clearings 
originating  in  commercial  transac- 
tions within  New  York — namely,  the 
total  amount  of  the  clearings  outside 
of  New  York  for  the  corresponding 
month.  In  other  words,  the  commer- 
cial transactions  originating  in  New^ 
York  in  general  about  make  up  for 
the  transactions  outside  New^  York 
which  do  not  influence  New  York. 
The  slight  Excess  of  New  York  over 
the  rest  of  the  country,  which  con- 
tinues even  in  the  deepest  depression, 
probably  roughly  corresponds  to  the 
amount  of  financial  clearings  occur- 
ing  even  then.  We  thus  arrive  at  the 
conclusion  that  the  Excess  of  New 
York  over  The  Rest  about  equals  the 
non-commercial  or  "financial"  trans- 
actions in  New^  York.  (This  is  curve 
A.) 

Again,  New^  York  being  the  finan- 
cial center  of  the  United  States  in  a 
very  real  and  overshadowing  sense, 
we  see  that  this  curve  is  a  very  good 


index  to  the  i)rogress  of  financial 
transactions  in  the  United  States.  In 
New  York's  financial  transactions  I 
include  all  transactions  both  on  the 
Stock  and  Consolidated  Exchanges, 
and  also  the  va^t  mass  of  unrecorded 
t ransactioyis  consisting  of  the  sales 
and  promotions,  purchases  and  nn- 
derivritings,  of  the  bond  houses  and 
(/reat  private  banks,  etc.  In  a  w^ord, 
the  figures  plotted  on  this  curve  indi- 
cate the  selling  to  the  public  of  se- 
curities, and  later  the  return  of  some 
of  the  same  (at  generally  lower 
prices),  and  thus  are  an  index  to  the 
Fixation  of  Capital  and,  later,  the 
Progress  of  Liquidation.  This  is  the 
reason  why  the  curve  is  so  valuable 
to  consider  and  why  its  relations  to 
the  maxima  and  minima  of  the  stock 
market  are  so  noticeable  as  to  be  be- 
yond the  realms  of  coincidence.  Fix- 
ation of  capital  naturally  brings 
about  a  dearth  of  loanable  funds  and 
a  fall  in  the  price  of  securities.  Li- 
quidation produces  loanable  funds 
and  recovery  is  in  the  immediate  fu- 
ture. 

Both  these  phenomena  are  very  ap- 
parent on  the  curve  A.  When  the  ex- 
cess of  New  York  over  the  rest  of  the 
country  approaches  anyw^here  near 
zero,  as  it  has  done  in  1900,  1903, 
1907,  and  1910,  liquidation  has  been 
in  progress  for  some  time  and  is  then 
probably  reasonably  complete.  When 
the  Excess  passes  the  straight  line 
3xa  or,  in  other  w^ords,  when  New^ 
York  is  clearing  more  than  twice  the 
normal  for  the  rest  of  the  country, 
there  is  revealed  a  progress  of  fixa- 
tion and  a  condition  of  tension  that 
cannot  long  be  continued.  The  Ex- 
cess curve  passed  this  line  3xa  in 
1899  and  w^e  had  the  "Rich  Man's 
Panic"  of  1900.  It  passed  this  line 
again  tow^ard  the  end  of  1900,  went 
to  unheard-of  heights  beyond  it  in 
1901  and  remained  so  through  1902, 
and  w^e  have  the  extreme   slump  of 


BANK    CLEARINGS    AND    SECURITY    PRICES 


base  below  whieli  the  figures  do  not 
go,  but  It'll ich  tlicji  sometimes  ap- 
proach, whereas  in  studying  New 
York,  without  The  Rest  as  such  a 
base  we  cannot  judge  of  the  depth  of 
a  decline  with  any  degree  of  ac- 
curacy. 

New  York's  clearings  may  be  ex- 
haustively divided  into  three  parts: 

1.  Clearings  originating  in  trans- 
actions outside  New  York. 

2.  Clearings  originating  in  com- 
mercial transactions  within  New 
York. 

3.  Clearings  originating  in  )ion- 
commo'cial  (or  "financial")  transac- 
tions within  New^  York. 

The  fact  that,  in  periods  when  New 
York's  financial  or  non-commercial 
transactions  are  known  to  be  almost 
at  a  standstill,  the  city  clears,  a  little 
more  than  the  whole  of  the  rest  of 
the  country,  gives  a  valuable  hint  as 
to  the  average  sum  total  of  the  clear- 
ings originating  in  transactions  out- 
side New  York  plus  the  clearings 
originating  in  commercial  transac- 
tions within  New  York — namely,  the 
total  amount  of  the  clearings  outside 
of  New  York  for  the  corresponding 
month.  In  other  w^ords,  the  commer- 
cial transactions  originating  in  New 
York  in  general  about  make  up  for 
the  transactions  outside  New  York 
which  do  not  influence  New  York. 
The  slight  Excess  of  New  York  over 
the  rest  of  the  country,  which  con- 
tinues even  in  the  deepest  depression, 
probably  roughly  corresponds  to  the 
amount  of  financial  clearings  occur- 
ing  even  then.  We  thus  arrive  at  the 
conclusion  that  the  Excess  of  New 
York  over  The  Rest  about  equals  the 
non-commercial  or  "financial"  trans- 
actions in  New  York.  (This  is  curve 
A.) 

Again,  New  York  being  the  finan- 
cial center  of  the  United  States  in  a 
very  real  and  overshadowing  sense, 
w'e  see  that  this  curve  is  a  very  good 


index  to  the  progress  of  financial 
transactions  in  the  United  States.  In 
New  York's  financial  transactions  I 
include  all  transactions  both  on  the 
Stock  and  Consolidated  Exchanges, 
and  also  tJie  vast  mass  of  unrecorded 
t ransactio7is  consisting  of  the  sales 
and  promotions,  purchases  aiid  un- 
deriuritings,  of  the  bond  houses  and 
( treat  private  banks,  etc.  In  a  word, 
the  figures  plotted  on  this  curve  indi- 
cate the  selling  to  the  public  of  se- 
curities, and  later  the  return  of  some 
of  the  same  (at  generally  low^er 
prices),  and  thus  are  an  index  to  the 
Fixation  of  Capital  and,  later,  the 
Progress  of  Liquidation.  This  is  the 
reason  why  the  curve  is  so  valuable 
to  consider  and  why  its  relations  to 
the  maxima  and  minima  of  the  stock 
market  are  so  noticeable  as  to  be  be- 
yond the  realms  of  coincidence.  Fix- 
ation of  capital  naturally  brings 
about  a  dearth  of  loanable  funds  and 
a  fall  in  the  price  of  securities.  Li- 
quidation produces  loanable  funds 
and  recovery  is  in  the  immediate  fu- 
ture. 

Both  these  phenomena  are  very  ap- 
parent on  the  curve  A.  When  the  ex- 
cess of  New  York  over  the  rest  of  the 
country  approaches  anywhere  near 
zero,  as  it  has  done  in  1900,  1903, 
1907,  and  1910,  liquidation  has  been 
in  progress  for  some  time  and  is  then 
probably  reasonably  complete.  When 
the  Excess  passes  the  straight  line 
3xa  or,  in  other  words,  when  New 
York  is  clearing  more  than  twice  the 
normal  for  the  rest  of  the  country, 
there  is  revealed  a  progress  of  fixa- 
tion and  a  condition  of  tension  that 
cannot  long  be  continued.  The  Ex- 
cess curve  passed  this  line  3xa  in 
1899  and  w^e  had  the  "Rich  Man's 
Panic"  of  1900.  It  passed  this  line 
again  toward  the  end  of  1900,  went 
to  unheard-of  heights  beyond  it  in 
1901  and  remained  so  through  1902, 
and  w^e  have  the  extreme  slump  of 


MOODY'S    MAGAZINE 


1908.  1903  was  worse  than  1900  be- 
cause the  fixation  had  continued  for  v, 
longer  time.  The  same  results  were 
seen  in  1907  and  in  1910.  A  study  of 
the  area  figures  and  the  percentages 
will  illustrate  the  wonderful  correla- 
tion between  the  amount  of  fixation 
and  the  severity  of  periods  of  panic 
or  depression. 

Conversely,  a  long  period  of  low- 
ness  in  the  curve,  which  means  inac- 
tivity in  the  financial  world  and  sav- 
ing in  the  country  at  large,  is  the 
sure  precursor  of  a  period  of  activity 
in  finance  snd  a  rise  in  the  price  of 
securities.  The  continued  low  level 
of  this  curve  during  1894,  1895,  and 
1896  was  followed  by  "The  Ameri- 
can Invasion  of  Europe"  and  the 
great  bull  market  of  1897  and  1898. 
The  low  level  of  this  curve  A  in  1900 
was  followed  by  the  phenomenal  rise 
in  securities  during  1901  and  1902, 
and  this  even  though  the  drop  in  se- 
curities during  1900  was  so  small  as 
to  make  it  appear  questionable 
whether  liquidation  was  complete  or 
not.  The  prolonged  low  level  of  1903 
and  1904  was  followed  by  the  ram- 
pant bull  market  of  1904,  1905,  and 
1906.    So  with  1907  and  1908. 

The  extreme  ranges  of  the  market 
(asterisks)  follow  the  curve  A  very 
closely.  Whenever  this  curve  crosses, 
(m  the  (lownirard  movement,  the  line 
X,  a  turn  for  the  better  is  probably 
about  to  occur.  The^^e  /v/rw.s  /;/  the 
m.arket  seem  to  ocr/tr  as  soon  as  the 
curve  so  crosses  the  line  x  ivithoiif 
ivaiting  for  ann  recovery  in  the  curve 
A  itself.  Vice  versa,  whenever  the 
curve  crosses,  on  the  upward  move- 
ment, the  line  3xa,  overexpansion  and 
fixation  is  indicated  and  a  turn  for 
the  worse  likely  to  occur,  though 
when  it  is  not  so  definite  as  upon  the 
lower  crossings. 

I  do  not  claim  that  this  curve  A  is 
a  touchstone  by  which,  without  the 
aid  of  other  statistics,  turns  of  the 


market  may  be  predicted,  but  I  do 
believe  that  any  speculator  who 
would  neglect  it  is  acting  in  a  very 
foolish  minner.  When  used  in  con- 
nection with,  say  the  reports  of  the 
New  York  Associated  Banks,  for  in- 
stance, its  significance  is  apparent. 
One  of  the  surest  signs  of  the  ap- 
proach of  liquidation  is  the  loans 
passifig  the  deposits.  There  is  no 
single  sign  telling  when  to  sell  so  in- 
fallible as  this.  But  all  single  signs 
mislead  and,  again,  when  shall  we  re- 
purchase? 

Toward  the  close  of  1902  loans 
began  to  run  in  excess  of  deposits, 
and  then  a  few  weeks  later  deposits 
were  again  in  excess  of  loans — shall 
our  speculator  sell  out  or  is  the  hori- 
zon clear?  He  examines  the  Excess 
figures  (A)  and  finds  them  running 
up  to  3xa  or  New  York  clearing 
twice  what  The  Rest  is  clearing.  Of 
course  he  must  sell.  He  waits  and  in 
September,  1903,  the  A  curve  crosses 
the  X  line  (i.  e.,  N.  Y.  equals  1  1-3 
The  Rest)  and  he  buys  at  the  hottoyn. 
By  the  time  the  deposits  have  again 
passed  the  loans  he  has  a  profit  of 
over  ten  points  on  the  Wall  St)-eet 
JouryiaVs  20  Rails! 

This  is  not  fakery.  The  market 
does  not  turn  because  some  imagi- 
nary line  in  the  head  of  some  theorist 
crosses  another  imaginary  line.  The 
reasons  for  the  turn  are,  however, 
apparent  on  the  lines.  While  New 
York  is  liquidating,  financial  clear- 
ings are  continuing.  When  New 
York  (or  the  country  through  New- 
York)  is  through  with  licjuidation 
the  financial  clearings  arc  rlmost  nil 
and  the  line  representing  the  excess 
of  New  York  over  The  Rest  ap- 
proaches zero.  To  sell,  watch  pri- 
marily the  loans  passing  the  depos- 
its; to  buy,  watch  primarily  the  Ex- 
cess of  New  York  passing  the  line  x 
(New  York  clearing  less  than  one 
and  one-third  times  The  Rest). 


BANK    CLEARINGS    AND    SECURITY' •PR'lCES*'' 


In  the  fall  of  1905  the  loans  i)ass 
the  deposits.  Shall  we  sell?  New 
York  Excess  is  at  an  extreme  heijrht. 
By  all  means  sell.  We  ^et  about  the 
top  of  the  market  aiul  1907  only  two 
years  ahead!  In  June,  1907,  the  ex- 
cess toiirlics  the  line  x  but  not  till 
November  does  it  decisively  cross  the 
line.  We  then  buy  at  about  the  bot- 
tom— and  we  dare  do  this  thoug-h 
loans  are  still  sixty  million  in  excess 
of  deposits  and  there  is  a  huge  deficit 
in  the  reserves.  Liquidation  is  com- 
plete, however,  and  a  turn  for  the 
better  is  due.  On  November  6,  1909, 
the  loans  pt'ss  the  deposits  and  the 
New  York  surplus  is  down  to  five 
million.  The  New  York  Excess  has 
not  yet  passed  the  3xa  line,  but  is 
fairly  high.  We  can  sell  here  at  al- 
most the  top  or  wait  till  the  Excess 
does  pass  the  line  3xa  early  in  Janu- 
ary, wiien  we  do  not  get  as  high  a  fig- 
ure but  still  have  the  range  running 
clear  down  toward  July  26  for  profit 
taking.  In  August,  1910,  the  Excess 
goes  well  below  the  line  x  and  if  we 
buy  the  20  Rails  at  the  beginning  of 
September,  we  purchase  them  at  less 
than  111,  with  an  opportunity  in 
February  to  realize  over  119  mid 
yiever  a  daij  on  ivhich  the  price 
}anged   below   the   purchase   price. 

Finally,  what  is  the  present  out- 
look? In  the  first  place,  in  writing 
an  article  like  this,  I  am  attempting 
to  explain  one  market  factor.  We 
must  not  forget,  however,  that  other 
factors  should  be  considered.  We  are 
already  (April  25)  eight  months 
ahead  of  where  New  York's  Excess 
clearings  point  to  a  comparative 
completion  of  liquidation ;  w^e  are 
fourteen  weeks  ahead  of  where  the 


dei)osits  passed  the  loans  and  the  sur- 
l)lus  reserves  began  to  increase;  both 
surplus  deposits  and  surplus  reserves 
are  now  in  an  extremely  easy  condi- 
tion ;  moiu'y  is  almost  a  drug  on  the 
New  Y()i"k  market  ;  from  an  ex- 
tremely unfavorable  balance  of  trade, 
we  have  passed  to  a  condition  of  the 
very  opposite  nature;  (ind  ijet  i^tocks 
do  not  stand  half  irai/  up  from  the 
loir  Icrcl  of  1910  lo  the  hif/h  of  the 
sdine  ijear!  Of  course  the  universal 
reason  given  for  s\ich  hesitancy  is 
the  Supreme  Court  decisions.*  But 
1  believe  we  overestimate  their  sig- 
nificance. In  the  long  run  "money 
talks"  and  the  monetary  factors  are 
at  present  decidedly  bullish. 

The  present  situation  is  not  alto- 
gether without  precedent.  In  Au- 
gust, 1903,  the  New  York  Excess 
crossed  the  line  x.  Loans  had  passed 
deposits  late  in  1902  and  from  that 
date  through  1903  and  up  into  1904 
the  ratio  of  loans  to  deposits  and  the 
condition  of  the  reserves  were  month 
by  month  astonishingly  similar  to  the 
conditions  in  the  same  factors  during 
the  fall  of  1909,  through  1910,  and 
into  1911.  The  market  turned  in  Au- 
gust, 1903,  but  became  more  and 
more  sluggish  until  June,  1904,  when 
stock  sales  touched  a  minimum — ex- 
actly similar  to  our  own  experience 
so  far.  In  the  meantime  the  market 
had  recovered  but  little  (see  chart). 
It  was  aw^aiting  the  decision  of  the 
Supreme  Court  on  the  Northern  Se- 
curities case.  The  long-looked-for 
decision  came  on  March  14,  1904.  It 
iras  adrerse,  upholding  neaiiii  all  the 
goveryiment's  contentions,  and  was 
followed  h]i  the  gigantic  hidl  move- 
ment ivhich  terminated  in  1906! 


Mr.     Macaulav' 
(litnr. 


articK-     was     urittin     thrc 


bcfdie     tile     Staiiilanl     Oil     ihcision     v 


innounccd. 


84C0G7 


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